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INVESTING | 9/12/2013 @ 2:39PM |640 views
INTERVIEW: U.S. Deficit, Gold Price Show Relationship -- ETF Securities McGlone
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(Kitco News) - The size of the U.S. deficit and the price of gold show a striking relationship as they both reflect each other, says the head of research for an exchange-traded fund.
The U.S. deficit currently stands around $16.7 trillion, up from about $6 trillion in 1999. During the same time, gold prices rallied to about the mid-$1,300s an ounce currently, from about $300. Also during this time the gold price roughly lagged the size of the U.S. deficit by about $300, said Mike McGlone, head of U.S. research for ETF Securities.
In other words, hack off the several extra zeros on the U.S. deficit so just the first four digits are represented. In this case it would be $1,617. Compare that to the current price of gold, which is fluctuating between $1,300 and $1,400. The difference between the two is roughly about $300, depending on the volatility of gold that day, McGlone said.
What makes that historical tidbit salient for now is that President Obama and Congress will soon discuss raising the debt ceiling. The debt ceiling is the amount that the nation is allowed to borrow. In order for the U.S. to pay for all the things that Congress has already bought, which includes everything from spending in the budget bills to Social Security payments and interest on bonds, the debt ceiling must be raised or the U.S. could default.
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The last time Congress and Obama had these negotiations in August 2011, it was a heated battle, resulting in Standard & Poor’s downgrading the U.S. debt rating and gold futures prices hitting an all-time nominal high of $1,923.70 in September. Worries about the health of the eurozone were also at the forefront. At that time the debt ceiling was raised to $16.7 trillion, McGlone said.
The U.S. Treasury Department estimates it will hit that debt ceiling in about October. While a protracted battle may occur again in Washington, the current economic environment is different now – gold prices are far from their all-time high and concerns over Europe are lessened.
McGlone said he isn’t forecasting a repeat of history, explaining that if markets thought the budget fights would be so rough then “gold would be higher.”
Rather, he said, it’s more interesting to look at how much the debt ceiling was raised in the past and project how high it might be if that same measurement was used during these negotiations.
In the past two debt ceiling increases, the average increase was about 15%, he said. If it was raised again by 15%, the debt ceiling would be close to $20 trillion.
“I’m not making an estimate or a prediction of what will happen, I’m just projecting based on what has happened,” he said.
McGlone said since 1997 the average increase was closer to 7%, but he added: “we know the budget is not growing slowly, it’s growing fast.”
Using simple math, if the trend of gold lagging the debt ceiling by $300 an ounce continues, and if the debt ceiling is raised again to be near $20 trillion, that could mean an eventual rise for gold to roughly $1,700.
McGlone said the point of his research is not to pinpoint what the debt ceiling may be, but to show how sovereign debt issues and gold are linked.
“I didn’t intentionally want to make a dig into what the (debt ceiling) is going to be, but the point is, and this is what should matter to investors … gold hit its high two years ago because of sovereign debt issues and here’s the world’s largest sovereign debt issue coming to a head,” he said.